Hospitality Upswing: More guests, higher occupancy

More heads in beds is reviving the once moribund hospitality industry.

“Increased occupancy is occurring as a result of the overall economic recovery and, more specifically, the return of certain customer segments such as the business traveler,” explains Andrew M. Sims, president and chief executive officer of Williamsburg, Va.-based MHI Hospitality Corporation, a real estate investment trust (REIT). “Healthy occupancy levels have provided confidence for operators to begin to move rates higher. I believe the recovery will continue for our industry. Smooth sailing, however, may be interrupted by periods of rough seas, dependent upon the overall economic recovery.”

What is surprising for the industry is the hotel recovery is happening at such a rapid clip, says Richard C. Conti, President of Plasencia Group, a national hospitality real estate investment sales firm headquartered in Tampa, and chairman of ULI’s Hotel Development Council. “The traditional U.S. hotel industry’s demand usually follows the Gross Domestic Product (GDP) and the industry usually goes through a 8-12 year cycle,” he continues. “But it seems the cycles have gotten shorter. Revenue per available room (RevPAR) in the 2010 first quarter was down slightly, but up 6% in the second quarter and is expected to be up nearly 8% in the third quarter. Experts had predicted it would be down for 2010, but now are saying it could be up between 3 and 6%.”?

This year’s recovery in RevPAR has been primarily occupancy driven but at a slightly lower room rate. “What we look for going forward is to begin raising rates once demand starts growing by 2%,” Conti continues, “and we believe that will happen in 2011.”

MHI’s Sims notes that his company — whose value proposition is acquiring and repositioning distressed hotel assets — is entering its 53rd year in the hospitality industry. “Presently we are repositioning one asset in Raleigh, N.C., from mid-scale to upper-upscale,” he says. “Renewed growth is on the short list of priorities, right behind balance sheet restructuring and the reinstatement of a dividend.”

Those interested in the hospitality industry should focus on the customer first and foremost, he advises. “During the recession we cut our rates drastically and consequently we backed off on the level of service to preserve profits,” Sims says. “A renewed focus on the customer will broaden the opportunity to raise rates. If we, as an industry, provide a memorable product and experience for our guest, we should not be reluctant to charge the appropriate rate.”

Will the hospitality recovery spur new development? Probably – but not right away. Conti says developers of potential new hotels should enter the arena early in the cycle. “If you’re a developer, there is not a lot of debt money ready for development,” he points out. “There is a growing amount of debt money available for acquisitions, though, and plenty of equity available. From a real estate viewpoint, we think development debt money might be available in mid 2011.”??

The goal of potential developers should be to build now, ride the expected boom up, and try to exit before the market hits the peak – as it usually does, he adds.?

“Those who can develop hotels early in the cycle, and do it with all equity or who have some debt sources, will be the ones who make a lot of money, especially those who can sell their hotel assets before the industry passes the peak of the cycle,” Conti says.